Simple access to asset class aims to provide good returns, low correlation to traditional markets, and transparency
While Horizons ETFs just launched Canada’s first carbon credit ETF, the Horizons Carbon Credits ETF, to a modest reception on the Toronto Stock Exchange (TSE), it expects it to soon become an increasingly popular asset class, especially with current interest from Alberta investors.
“This wasn’t something where we were expecting to blow the doors off the barn, right out of the gate. I think this is an asset class that we’re committed to for the next three to five years,” Mark Noble, Horizons ETFs’ Executive Vice President of ETF Strategy, told Wealth Professional.
“I think, over the next year, we’ll start to get momentum as more Canadian investors start to understand what these are and how they work because an ETF provides the easiest, simplest way to get exposed to this market, since we’re simply holding European carbon credit futures.”
The fund is one of two recently launched. Noble said Horizons’ is an index strategy, which is simply buying European carbon credit futures, the one most people are watching now. So, there’s a lot of transparency as it creates a relatively low-cost exposure for Canadian investors to access carbon credits.
Ninepoint Partners, which launched its fund just hours after Horizons’ ETF, is offering a more active strategy using various carbon credits.
Noble said he expected Horizons’ fund to soon catch on for three key reasons. The first is that people are interested in this asset class’s appreciation.
“We’ve seen carbon credits go from the 20 to 30 Euro range, starting in 2022, to around 90 Euros now. That’s an astounding move up in valuation that, in itself, has obviously brought a lot of investors into this space,” he said.
Secondly, he said, “I think that there’s a general understanding globally that carbon emissions need to be reduced in the developed world. The European system, in particular, seems to be putting in place a cap and trade system that is reducing carbon emissions, and we’ve seen carbon emissions in Europe drop as a result to a certain degree.”.
Since it launched in 2005, he said the European index has helped to reduce European emissions from power generation and energy intensive industries by 42%. “That’s a fairly incredible benchmark of success,” said Noble. “So, there’s definitely a feel good aspect to this investment category.”
That’s especially true for investors seeking a greener, decarbonized economy since he noted that the credits can only be created as a result of companies going below the emission targets.
“It’s a way to create a carrot for lower carbon generation amongst industry and it creates a very interesting way for investors to align their values and put their money toward an asset class that’s effectively reducing greenhouse gases,” said Noble. “So, that has attracted a lot of institutional as well as retail investors into the space.”
Finally, although this new asset class has a very low correlation to energy prices, it has a low to no correlation with the equity market and a very low correlation to fixed income. So, Nobel said, “it serves as a true diversifier, a true liquid alternative, and that is always something that’s in demand for institutions and asset allocators looking for non-correlated sources of return for the portfolio.”
Horizons launched the fund on the TSX in mid-February after spending most of 2021 developing it.
“We found, with the massive run-up in carbon credit prices in 2021, that sparked a lot more interest in using the Europe carbon credit futures, which are referred to as EUA,” he said. “They had a proper depth of liquidity that we were comfortable to launch an ETF.”
Now, Noble said the only real challenge to generating Canadian assets in this asset class is making more Canadians aware of it, but it’s already gaining interest from Alberta energy investors.
“This cap and trade system aligns itself nicely with the oil and gas industry of Alberta, so it’s a way for the oil and gas industry to evolve, but still be a viable business,” he said, noting those investors “view this as a way for carbon fuel production to continue in a global environment” since they’re interested in the carbon offsets.
“So that, for me, especially in the Canadian environment” said Noble, “is a big thumbs up that there are real legs for this asset class.”
